Housing is most people’s biggest expense.  That’s why, of all of the expenses we each have, it’s essential to get our housing costs right.  It’s one of the most important keys to being able to be generous, save and invest adequately, and live with financial margin and peace of mind.

How much of a down payment should I make?

With mortgage rates at record lows and homes on deep discount in many cities, it can be tempting to buy now even if you don’t have much money for a down payment.  However, I strongly recommend that you wait until you can afford a 20 percent down payment.

Putting 20 percent down demonstrates the discipline to save.  Plus, it prevents you from having to pay private mortgage insurance.

How large a mortgage payment can I afford?

Lenders typically tell people they can afford to devote 28 percent of their monthly gross income to the combination of their mortgage, property taxes, and homeowner’s insurance.  When you include other debts, such as credit card balances, student loans, and vehicle loans, they want all of those monthly payments plus housing to total no more than 36 to 40 percent of your monthly gross income, depending on the lender.

It’s far better to spend less.

As I developed Recommended Spending Guidelines and Recommended Housing Guidelines for households across nine different incomes and four different household sizes, I found that the ideal is to spend no more than 25 percent of your monthly gross income on housing, and have no other debt – no credit card balances carried from month to month, no vehicle loans – no other debt.

In fact, it’s best to keep the housing percentage even lower than 25 percent, especially if you’re not just saving for your retirement, but are saving to help your kids pay for college as well.

Mortgage advice for double income households

Here’s the kicker.  It’s best to keep housing costs to no more than 25 percent of one income.

What?  That’s impossible, right?  Well, the common approach to money in our culture is to save too little, carry too much debt, live with too much financial stress, and fight about money too often with the people we love.  Do what’s uncommon and you’ll be able to enjoy uncommon financial success and peace of mind.

Basing housing costs on one income is especially important for young two-income couples that want to have kids one day and also want the freedom to have one person step out of the paid workforce while raising those kids.

But it’s important for others as well.  Buying a house that requires two incomes is risky. What happens if one person loses his or her job?

What if I’m spending too much on housing?

Please don’t shoot the messenger, but if you’re spending much more than 25 percent of monthly gross income on housing, your finances are probably going to be a challenge.  It’s going to seem impossible to be generous or to find the money to save or invest.  It’s going to feel like there’s never enough for this or that.

If this is your situation, consider something radical.  Consider moving to a more affordable house.

I know – it sounds crazy, completely unrealistic.  Selling a house, especially in this market, can be tough.  The whole process of moving is time consuming and disruptive.  But I’ve met people who have done exactly that.  They were living in houses they realized they could not afford and they moved.

One couple put their house up for sale at a time when other homes in their community were sitting on the market for over a year, and yet theirs sold within 30 days and for nearly the full asking price.  The other, after selling their home, decided to live in the basement apartment in the home of some friends.  They stayed there for three years as they saved up enough money for a healthy down payment on a house they could truly afford.

Both couples took tough, humbling, counter-cultural action, and they got to a better place financially, emotionally, relationally, spiritually, and in other ways.

More than any other, housing is the expense category that can make you or break you.  Get it wrong and your house can own you.  Get it right and you’ve taken one of the most essential steps toward uncommon financial success.

What are your thoughts on these housing recommendations?  Let us know by leaving a comment.

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Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.


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  • Kirk Munsch

    Advice to heed here. If you cannot meet the criteria Matt has provided above you cannot afford the house.

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